What is an ERC-20 token?

• ERC-20 is short for Ethereum Request for Comments, comment or proposal 20, an Ethereum Improvement Proposal on GitHub

• ERC-20 was invented to create a standard for communicating smart contracts with each other

• The ERC-20 token was a vital link in the heyday of the ICO

• Trading with an ERC-20 token on a DEX is very complicated

• The advantages and disadvantages of the ERC-20 token

• What is the future for the ERC-20 token?

What does ERC-20 mean?

ERC-20 stands for the acronym Ethereum Request for Comments, comment 20. Ethereum has a GitHub page, where proposals can be made for improving the Ethereum blockchain, called an Ethereum Improvement Proposal. Since this proposal was from the early days and was the 20th, it was logically named ERC-20.

The proposal was made in 2015 by Fabian Vogelsteller and adopted as a standard in 2017. It is the most famous and important proposal in Ethereum's history, given the enormous popularity of this standard. Hundreds of thousands of ERC-20 tokens have already been marketed through this standard.

ERC-20 is a token standard that implements an API (Application Programming Interface) for tokens within a smart contract. Examples of the functions it can generate:

• Transferring Tokens from one account to another

• View balance of an account

• Show total supply of the token on a network

• Approving the issuance of tokens from an account by a third party

An ERC-20 token is redeemable, or fungible. You've seen one, you've seen them all.

Why is ERC-20 included as a standard?

As Ethereum began to grow in popularity, all kinds of teams developed smart contracts. The problem was that there was no standard, so all these smart contracts could not communicate with each other. The solution was the ERC-20 standard.

Another major advantage of ERC-20 is the ability to easily start a cryptocurrency. Without this standard, you would have to build a cryptocurrency from the bottom up yourself. Then CoinGecko's list would be a lot smaller, that's for sure.

The ERC-20 protocol ensures that all the different tokens that work with it can communicate on Ethereum itself. So you can join a very large family pretty quickly, which is hugely important for start-up tokens. Owning ETH, which is used for using a smart contract, is so widespread that you get access to a lot of users and the rich ecosystem, especially in DeFi, of Ethereum.

Smart contracts

This is a technical standard best compared to a vending machine at the train station. If you throw 1 euro into the machine and type in code 112, the treat falls into the collection bin behind code 112. So it is a typical if/then construction and the rules are basically simple.

What is the difference between a token and a coin?

You often see the term token and coin used interchangeably. Yet this is not correct. If you want to start a cryptocurrency, you can do so on your own blockchain or someone else's.

If you want to start a token on the blockchain of another network, for example Ethereum, you cannot call it a coin (yet). So an ERC-20 coin does not exist.

When you start a cryptocurrency on your own blockchain we are dealing with a coin. Since this is incredibly difficult and requires a lot of programming from your team, many people decide to start with a token. Sometimes that later grows into a coin.

A coin is also necessary for a blockchain to work, for a token this does not apply.

A token on Ethereum can represent anything, such as fiat money, an ounce of gold, financial assets, lottery tickets, character traits of a player in a game, et cetera.

Starting an ERC-20 token on the Ethereum blockchain

An ERC-20 token must meet certain conditions. This sets the standard and gives you a token that is usable on the Ethereum blockchain. Since it is in computer language, each output states what function it has (Function).

1. (Function) TotalSupply. This tells the team how many tokens there are in total.

2. BalanceOf. Shows how many tokens the owner has.

3. Transfer. Raises a specified number of tokens to a given address.

4. TransferFrom. Allows owners to send tokens and/or have fees paid in another currency.

5. Approve. To prevent attacks, the value of "allowance" must first be set to 0 via this command.

6. Allowance. Displays the amount that can still be legitimately received from the owner.

   Optional:

7. Name. For example, AnyCoin Direct Coin.

8. Symbol. For example, ACDC.

9. Decimals. Entering 8 here means that 100,000,000 particles together represent 1 token, for example satoshi in the Bitcoin blockchain.

If these conditions are met in a smart contract, you can create tokens on the Ethereum blockchain just like that. This is how a lot of coins started, such as Tron, EOS and VeChain. Once your token is successful you can possibly switch to your own blockchain and launch a coin.

As you can see, an ERC-20 token doesn't have that many features at all. That is why it is so easy to develop one. The main reason for its existence and popularity is the exchange of value between people using the Ethereum ecosystem.

The importance of ERC-20 in an ICO

Suppose you have an incredibly good idea. You are almost certain that everyone will work with your idea. However, you don't have a team and you don't have any money. In that case, you can start as an ERC-20 token.

You can create your own token on the Ethereum network through ERC-20 in as little as an hour's work, if you can get along with computers a bit. Once you have created the token and the smart contract is online you can get people to invest in your token, so you can raise funds for a team.

In the glory days of the ICO, new tokens followed one after another. Most of these were launched on the Ethereum network via an ERC-20 token. Often at first, you could only trade them at a place where you could only trade the new tokens with ETH, such as UniSwap or SushiSwap.

Once enough money is raised and your team gets going, you can start working on your own cryptocurrency and have the token exchanged for a native coin. Or you can throw in a cozy back pull against it.

If you look at the new coins in CoinGecko you will see that a lot of new crypto currencies still work with the Ethereum network. And that's because of their ERC-20 standard, which not only allows you to set up a token quickly, but also gives you access to their entire blockchain.

Creating apps with an ERC-20 token on the Ethereum network

Large numbers of decentralized apps have already been created on Ethereum. Such a dApp is fairly easy to create.

Especially in the field of DeFi, Ethereum is incredibly popular and very useful. A lot of DeFi blockchains started their careers as ERC-20 tokens during the DeFi hype some time back.

However, Ethereum is used for many more dApps, such as a DAO, development tools and oracles.

ERC-20 and the DEX

Anyone who has been around for a while will remember the irritation when you had to pay 50 euros again to purchase a coin or token. But it was the only way to do so via such a DEX. Fortunately, those days are over, as there is now stiff competition from PancakeSwap and other networks, which bypass ETH. Solana and Binance Smart Chain have since gained a firm foothold, though, as have other cryptocurrencies that are also looking to get a piece of the pie. Vitalik Buterin did recognize that such amounts for a single trade are no longer acceptable, and he and his team are working firmly on roll ups to reduce costs and increase speed.

If a token is not yet listed on a central exchange then you will have to purchase it through the smart contract on the ERC-20 type token's website or through a DEX. The smart contract can then be found in a variety of places, such as CoinGecko. You copy and paste this into a DEX and specify which coin you want to give for it, for example ETH.

Since there are all kinds of suspicious characters running around on a DEX, you have to be very careful that you use the right contract, because you can easily accept another contract that is not the right one. Then, for example, you get tokens that are similar to the ERC20 token you are interested in, but have no value. It is best to get the contract from the official site of the token itself.

Working with a DEX and a suitable wallet for this is very tricky and it is not recommended to bet large amounts here, especially if you are just starting out.

Wallet address

If you're just starting out with cryptocurrency, you can go crazy with all the things you need to know and remember. It happens to everyone that they sometimes send tokens or coins to the wrong address. And then you lose that shipment!

An ERC-20 token works only on the Ethereum blockchain. If you send such a token to the Binance Smart Chain or to Solana, you lose everything you sent. Whether you send it to a hardware wallet, an echange, a broker or a software wallet, the address just has to be right.

An example of an ERC-20 token address is:

“0x5bBeb6053F3E986Fb9A09f33669435E7Ef1BeAed”

Fortunately, you don't have to remember these addresses, you can just copy and paste them. But you do need to specify the correct network in your wallet to deposit your tokens on. You will be asked this when you send the tokens from one address to another. And so then you have to enter that it should be sent to the Ethereum network as an ERC-20 token.

A workaround for this is to send a small amount first and only then send the large amount. See that tenner in tokens arrive, then that billion dollars you send later will arrive too! Most wallets, such as the Ledger Nano S, will surely support ERC-20, but when it comes to other networks that are less popular, be careful.

Benefits of the ERC-20 token

• Standardization. In no time, you can be a member of the Ethereum family and interact with their entire ecosystem.

• Little technical knowledge required at startup token.

• Low start-up costs.

• Swap with different ERC20 tokens in the ecosystem. Value is easy to exchange with all participants in the Ethereum network.

• Using smart contracts from the Ethereum network. This way you reduce the cost of starting a token.

• Developer support on Ethereum. You get all kinds of opportunities to take advantage of that.

• Access to the entire Ethereum ecosystem. This allows you to become successful very quickly with your own ERC-20 token.

Disadvantages of ERC-20 tokens

• Standardization. Although this is also an advantage, there are also disadvantages to a standard, because you cannot deviate from it. If you want to do so, you have to make your own coin.

• High cost and low scalability. It has to be said that Ethereum is working hard on this, but still this can cause problems when the network is slow and expensive when congested again.

• You are dependent of developments on the Ethereum blockchain.

• Smart contracts are tricky to draft. They are also immutable. Even the smallest mistake in a smart contract can make your entire token worthless or dangerous to work with. Should that happen, you have to start all over again.

• If you want to turn your token into a coin then you must all about doing.

Other well-known ERC standards

• ERC-721, used for unique NFTs, or non fungible tokens.

• ERC-777, for additional functionality of tokens.

• ERC-1155, used for a multi token standard, a combination of ERC-20 and ERC-721. It can be either fungible or non fungible.

• ERC-4626, tokenized vault standard, this is used in DeFi for revenue generation, such as farming and interest.

The future of the ERC-20 token

Who would have thought that a proposal from the early days of Ethereum would become so successful? Apparently, there is a huge need for standardization in the world of cryptocurrency and blockchain.

Numbers don't lie. If hundreds of thousands of tokens have been started this way, there will be something of skill and profit in it.

Fabian apparently counted his birds well, because his standard has become almost legendary among all those Improvement Proposals. So it is to be expected that this popularity will continue for a very long time, until some developer comes up with a concept even more convenient and easy than ERC-20.

Should that ever happen, we promise you that we will write an article about it as well. Then again, that would be a special achievement that might last forever.